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Monday, June 18, 2012

Why oil price and grain price follow each other

This is a sad hoax, for industrial man no longer
eats potatoes made from solar energy; now he eats potatoes partly made of oil.

(Howard T. Odum, Environment, Power, and Society, 1971)

Farming uses energy in many different forms: diesel for tractors and pumps; electricity for pumps, fans and indoor machinery such as milking machines, etc. Fertilizers represent a big energy use. Energy represents 90% of the production costs for nitrogen fertilizers, 30% for phosphorus fertilizers and 15% for potassium fertilizers. For production in the United States, energy costs represented 22–27% of the production costs for wheat, maize and cotton and 14% of the production costs for soybeans[1] (US CRS 2004). These figures do not include embedded costs in buildings, machinery, etc., so the actual share of the costs is substantially higher. In Argentina, energy costs were calculated to 43% of production costs in 2006 (Baltzer et al. 2008). In a situation with rising energy prices, agriculture prices will follow suit. This could also be seen in the case of food prices and in the case of the oil price hike in 2007–2008.[2] Increased energy prices influence food prices:

by making the production more expensive;

by making biofuel more interesting to produce and, therefore, reducing the production of food, leading to higher prices;

through increased transport costs that directly reflect on food prices; and

through reduced competition in the food sector (increased transport costs means that the pressure of global competition is reduced).

[1] Can be grown without nitrogen
fertilizers as they bring about natural nitrogen fixation.

[2] Other factors too were driving this,
but increased oil price doubtless was one if not the main driver.